SAVE THE DATE!

This Thursday evening, February 6th, the New York County Lawyers Association Committee on Corporations, LLCs and Partnerships chaired by Gerard Mantese is sponsoring an in-person/webinar CLE program on succession planning and shareholder/member litigation with a spectacular line-up of panelists including Associate Justice Leonard Austin (Ret.), Commercial Division Justices Andrea Masley and Joel Cohen, arbitrator/mediators Richard Lutringer and Simeon Baum, T&E practitioner Michael Miller, business advisor William Bierce, business appraiser Nathan Gallagher, and yours truly. For more information click here. Hope to see you there!


With apologies to the pseudonymous children’s book author Watty Piper, this is the story of a humble buy-sell provision in a family-owned LLC’s operating agreement that temporarily ran out of steam in the lower court, only to climb the steep appellate tracks arguing “I think I can, Your Honor!” and, in the end, win enforcement by unanimous decision.

Not exactly a heartwarming bedtime story for the young’uns but certainly one of interest to drafters of owner agreements and to business divorce lawyers.

The story involves a family-owned strip mall in the Bronx’s Kingsbridge neighborhood. The cast begins with the realty’s initial owners, brothers Dimitrios and Elias Katsikoumbas. Elias died in 2003. In 2006, the property’s ownership was placed in a limited liability company named Epiros LLC of which Dimitrios at least nominally was the sole member.

In 2010, Dimitrios as 51% managing member of Epiros and his late brothers’ daughter Maria and sons John and Stephanos as holders of an aggregate 49% membership interest — the parties disagree whether the latter interest was gifted by Dimitrios or inherited from Elias by some unstated means, but no matter — entered into a seven-page operating agreement. Dimitrios subsequently died after which his 51% interest passed to his wife, Christina.

The Buy-Sell Provision

The seeds of the eventual dispute are planted in the operating agreement’s buy-sell provision in Section 3(b). Putting aside its overall wisdom and how it was expressed, the concept was fairly simple: After an initial eight-year holding period, either the 51% owner (then Dimitrios, later Christina) or the 49% owners as a unit can offer their interest to the other, and if they can’t agree on price and terms the building is appraised and put on the market for sale, with the original offeree retaining a right of first refusal.

What follows in its entirety is the unedited text of Section 3(b) which I’ve broken up, enumerated, and inserted a few lettered subparagraphs for ease of reader digestion:

  1. After the expiration of the initial (8) year restriction on sale, if either the majority party (Dimitrios) or minority party (John, Stephanos, and Maria), wishes to sell its interest in the LLC, such offer to sell shall be made only to the other party.
  2. If [a] the party to whom the offer is made does not, within 30 days, accept the offer to purchase, and [b] both parties cannot agree as to who should buy the interest of the other and cannot agree upon a price, then, [c] all parties agree to sell the building to a third party, after an appraisal is done by two independent appraisers chosen by their accountant or their lawyer at the time the decision to sell is made.
  3. If a valid bona fide offer is made by a third party which is not less than $250,000.00 than the lowest independent appraisal, then, [a] the building either has to be sold to the third party or [b] the party to whom the offer was first made to sell at the same terms as those offered by the third party should that party choose to purchase the building.
  4. Should the party to whom this offer is made not accept to purchase the building within 30 days from when the offer is made, and agree to close within six months, then the building will be sold to the third party.
  5. The purchasing LLC member shall have ten business days after having received the third party’s offer in writing to decide in writing whether to purchase the entire interest of the LLC [w]ith the same terms as the third party.
  6. If that party does not exercise this option, then the building must be sold to the third party.
  7. With respect to third parties, the offer to sell shall be open for 90 days so that the best offer made during that time shall serve as the price to be paid for the building.

The Lawsuit

In 2021, with many retail businesses still suffering from the COVID-19 pandemic, a dispute arose between Christina and Maria, John, and Stephanos — from here on I’ll refer to the latter three as Plaintiffs — over Christina’s proposed handling of a rent abatement request by one of Epiros’s tenants. Whether or not it was the only precipitating factor, in August of that year Plaintiffs sent Christina a Section 3(b) notice offering to sell her their interest for $8,750,000 or to buy her interest for $9,000,000.

Within 30 days, Christina’s counsel replied by letter rejecting the “attempt to force a sale,” explaining that under Section 3(b),

First, the party to whom the offer to sell is made does not accept the offer to purchase. Second, that both parties cannot agree as to who should buy the interest of the other and, third, that the parties cannot agree upon a price. Then and only then is the sale portion triggered. In this instance, the only valid proposal was that of the Minority Party offering its interest for sale. The Majority Party is interested in discussing the terms of a sale, but, make no mistake, the Majority Party is not interested in selling its interest at any price to the Minority Party. Therefore, the second clause of the selloff of the Company is not, and shall not, be triggered. Therefore, the three parts of the forced sale are not met, and the Minority Party continues to be bound by the agreements, the LLC law and the caselaw.

Long story short, over the following months the parties and their lawyers continued to spar while also discussing Christina’s possible buy-out of the Plaintiffs’ 49% interest, but ultimately failed to reach agreement.

In April 2022, the Plaintiffs filed suit against Christina. Their complaint primarily sought declaratory relief and specific performance compelling Christina’s cooperation in obtaining appraisals and marketing for sale Epiros’s realty in accordance with Section 3(b).

In her answer to the complaint, Christina included a counterclaim for judgment “declaring that the provisions of the forced sale clause have not been and cannot be met without the Majority Party’s willingness to dispose of its interest in the LLC.”

The Lower Court Adopts Christina’s Reading of Section 3(b)

In mid-2023, Plaintiffs and Christina each filed motions for summary judgment respectively seeking judgments declaring for and against enforcement of the sale process under Section 3(b).

In January 2024, Bronx Commercial Division Justice Fidel Gomez handed down a detailed 19-page Decision and Order granting Christina’s summary judgment motion and dismissing Plaintiffs’ complaint. Justice Gomez adopted Christina’s position that unless both parties desire to sell their interest and cannot agree who will buy out whom, Section 3(b)’s mandatory sale provision does not kick in. Here’s the heart of his ruling:

The Court finds no ambiguity in the language of Section 3(b). As such, it must be interpreted based upon the plain meaning of its terms. Significantly, the conditions relating to the sale of the Building are set forth in the conjunctive, and, therefore, each one must be satisfied in order to force a sale of the Building. Contrary to plaintiffs’ contention, there are three distinct conditions precedent to the mandatory sale of the Building: (1) that the party to whom an offer to sell an interest in the LLC does not, within 30 days, accept the offer; (2) that both parties cannot agree as to who should buy the interest of the other; and (3) that the parties cannot agree on a price. By its plain terms, condition (2) contemplates a situation wherein both the Majority Party and the Minority Party desire to sell their interests but cannot agree as to which party will buy the interest of the other. Indeed, if both parties wish to sell their interest in the LLC, it makes sense to liquidate the sole asset of the LLC and distribute the profits from the sale to the members based on their respective interests in the LLC. . . . Thus, here, where the record evinces that there is no mutual agreement to sell the building, plaintiffs fail to establish prima facie entitlement to summary judgment on their causes of action for declaratory judgment and specific performance.

The Appellate Division Turns the Tide in Plaintiffs’ Favor

Plaintiffs appealed the Decision to the Appellate Division, First Department, which last week in Katsikoumbas v Katsikoumbas unanimously modified the lower court’s ruling by declaring that “paragraph 3(b) of the parties’ agreement requires the consent of either plaintiffs or Christina Katsikoumbas, but not necessarily both.” As the court further explained:

Supreme Court should have granted plaintiffs’ motion for summary judgment as to their first cause of action seeking a declaratory judgment regarding the interpretation of paragraph 3(b). Based on the agreement’s plain language, either plaintiffs or Christina are entitled to require the sale of either the building or the party’s interest in Epiros. Thus, as long as “either” Christina “or” plaintiffs “wishes to sell[]” its interest, a process is triggered whereby the party wishing to sell must make an offer. Nothing in the paragraph’s text requires both parties to agree on a sale of Epiros’s shares as a precondition for the sale of the building.

Nor does paragraph 3(b) require any agreement by both parties to sell their shares. In particular, the second “condition” — that the parties cannot agree as to who should buy the interest of the other — does not require that the parties had agreed, at some earlier time, on a sale of Epiros’s shares. An implied requirement that both parties agree to sell their shares cannot be harmonized with the triggering condition that “if either the majority party . . . or minority party . . . wishes to [sell] its interest.”

While the appellate ruling puts back on track Plaintiffs’ effort to achieve either a sale of their interest to Christina or a sale of the realty to a third party should they not agree on a buy-out, a sale of the realty has some miles to go. Given the breakdown in relations, I would not necessarily bet on a quick and painless process for obtaining two independent, reconcilable appraisals and agreeing on things like choice of broker, listing price, and terms of a third-party sale. Not to be forgotten, assuming the sale process attracts a bona fide third-party offer, Section 3(b) gives Christina a right of first refusal which can raise its own set of issues.

Simplicity Often Begets Problems

I’m unsurprised to see a seemingly simple buy-sell provision in a family-owned realty business like the one at issue in Katsikoumbas. I don’t mean the specific terms of that provision, but, rather, the looseness of the language used, the lack of attention to the kinds of details that can derail the buy-sell process, and also the failure to anticipate potential dysfunctionality baked into the design of the provision.

For instance, Christina contended that the Plaintiffs’ (and eventually the Appellate Division’s) reading of Section 3(b) supported an absurd result enabling Plaintiffs to set grossly inflated values of $8.75 million and $9 million in their buy-sell offer knowing Christina is not a seller, thereby effectively forcing her into a realty sale process even though she had no desire to sell her majority interest or the property. I have no clue whether her contention is true, but in theory it’s not an unfair criticism of the provision’s design.

As mentioned above, the provision’s failure to lay out in detail a transparent process and timeline for obtaining and reconciling two independent appraisals, and marketing the property for sale bespeaks an understandable but often misplaced (and sometimes self-delusional) faith a first generation owner has in his or her successor family members’ ability to work things out amicably when it comes to economic and personal interests that can and often do diverge over time.

I’m sure there are other fair criticisms of Section 3(b)’s design and other better solutions that experienced transactional counsel and business advisors could address with greater authority. Those are the folks business owners need to see before entering into business agreements, rather than litigators afterward.